Actuarial Outpost No 7 on SOA Sample Questions & Solutions for Derivatives Markets
 User Name Remember Me? Password
 Register Blogs Wiki FAQ Calendar Search Today's Posts Mark Forums Read
 FlashChat Actuarial Discussion Preliminary Exams CAS/SOA Exams Cyberchat Around the World Suggestions

Meet Valorie Mulder, DW Simpson Senior Recruiter

 Thread Tools Display Modes
#1
08-11-2007, 01:30 PM
 arlbcd5612 Join Date: May 2007 Posts: 26
No 7 on SOA Sample Questions & Solutions for Derivatives Markets

Hi, anyone finished the questions? I am confused by the No.7, at first thought, I selected the answer C (Prepaid forward contract). Then, I found the answer E is right (ie This arrangement is not possible due to arbitrage opportunities) too. We can borrow 100 at 6% to buy the stock, one year later, we get 110 from selling stock and return 100e^0.06 for borrowing, we get profit 110-100e^0.06.
#2
08-11-2007, 02:01 PM
 jraven Member Join Date: Aug 2007 Location: New Hampshire Studying for nothing! College: Penn State Posts: 1,262

At the time you actually enter into the contract you don't know what the future value of the stock will be, only that your ultimate profit will be S_1 - 100e^0.06. Since there is a risk that S_1 < 100e^0.06, this does not represent an arbitrage opportunity. That it ultimately turns out that S_1 = 110 is good for you, since you come out ahead, but irrelevant since you didn't know it would happen at the time you entered into the contract.

That said, the problem shouldn't really be making statements about the precise value of stocks in the future, what with the future not having happened yet and all. It gives the impression that the stock price is deterministic.
#3
08-12-2007, 12:56 AM
 arlbcd5612 Join Date: May 2007 Posts: 26

Thank you very much, Jraven. Your explain is crystal clear.

 Thread Tools Display Modes Linear Mode

 Posting Rules You may not post new threads You may not post replies You may not post attachments You may not edit your posts BB code is On Smilies are On [IMG] code is On HTML code is Off

All times are GMT -4. The time now is 11:03 PM.

 -- Default Style - Fluid Width ---- Default Style - Fixed Width ---- Old Default Style ---- Easy on the eyes ---- Smooth Darkness ---- Chestnut ---- Apple-ish Style ---- If Apples were blue ---- If Apples were green ---- If Apples were purple ---- Halloween 2007 ---- B&W ---- Halloween ---- AO Christmas Theme ---- Turkey Day Theme ---- AO 2007 beta ---- 4th Of July Contact Us - Actuarial Outpost - Archive - Privacy Statement - Top